PublicationTitle: All About Direct Loans
Direct Loans--Money for School Directly to You-1
Types of Direct Loans-3
Limit per Academic Year-4
How to Apply for a Direct Loan-9
After Loan Approval-10
What Happens While You're in School-12
Repaying Your Loan-14
The Direct Loan Servicing Center-14
Choosing a Plan-18
Options for Postponing Repayment-19
What Happens If You Don't Repay--Default-23
Loan Discharge (Cancellation)-25
Borrower Rights and Responsibilities-31
How to Reach Us-33
Direct Loans--Money for School Directly to You
If you've decided to borrow money to help pay for your education
after high school, the U.S. Department of Education offers a simple
way to get a loan: the William D. Ford Federal Direct Loan Program
("Direct Loans" for short). Here are some of the benefits of this
+ You will borrow money directly from the federal government
without having to find a bank (you'll receive your funds through your
school). So, you'll get your money much faster.
+ You'll have only one lender to deal with (the U.S. Department of
Education) once you begin repayment. Your loans will never be sold.
+ You can select the repayment plan that's right for your financial
+ You can change repayment plans if your financial circumstances
For 1995-96, approximately 1,350 schools participated in the Direct
Loan Program. Check with your school to see if it participates for
1996-97. If it doesn't, you may qualify to borrow under the Federal
Family Education Loan (FFEL) Program, which includes the Federal
Stafford Loan Program. If you've already goten an FFEL, you may--
under certain circumstances--convert it to a Direct Loan through the
Federal Direct Consolidation Loan Program. (See page 26 for more
information about consolidation.) Check out your options at your
school's financial aid office.
This booklet will give you the basic information you need about
Direct Loans. You'll learn about the types of Direct Loans, how
much you can borrow, how to apply for a loan, how you'll be paid
once you're approved for a loan, and what repayment options you
have. You'll learn what to do if you're having trouble making your
loan payments and what your rights and responsibilities are as a
borrower. Save this booklet -- it can answer future questions.
Types of Direct Loans
There are four types of Direct Loans:
+ Federal Direct Stafford/Ford Loans--also called Direct Subsidized
Loans."Subsidized" means the federal government pays the interest
on these loans while you're in school at least half time and during
grace periods and deferments (postponements of repayment). You
have to demonstrate financial need to receive this type of loan.
+ Federal Direct Unsubsidized Stafford/Ford Loans--also called
Direct Unsubsidized Loans. The federal government doesn't pay the
interest on these loans while you're in school, in a grace period, or in
deferment. You can get an Unsubsidized Loan regardless of financial
+ Federal Direct PLUS Loans--for parents with good credit histories
who want to borrow for their dependent students.1
+ Federal Direct Consolidation Loans--one or more federal education
loans combined into a new Direct Loan. Only one monthly payment
is made to the U.S. Department of Education. (See page 26 for more
1 You're a DEPENDENT student if you are NOT one of the
following: at least 24 years old by December 31, 1996, married, a
graduate or professional student, someone with legal dependents
other than a spouse, an orphan or ward of the court, or a veteran. If
you DO meet one of these conditions, you're an INDEPENDENT
student, which means you report only your own income and assets
(and those of a spouse) when applying for financial aid. Parents of
independent students are not eligible for Direct PLUS Loans.
Limit per Academic Year
The maximum amount you may borrow each academic year
+ your year in school
+ the length of your academic program
+ whether you're a dependent student or an independent student
The chart on the following page shows the maximum annual and
total amounts you may borrow. The amount you may borrow each
academic year is also limited by
+ your school costs
+ the amount of other financial aid you'll receive
+ (in the case of Direct Subsidized Loans) the Expected Family
Contribution (EFC). The EFC--the amount you and your family are
expected to pay from your own resources--is used in determining
your financial need. Your financial need is used to decide the amount
of your Direct Subsidized Loans. Your school can explain how your
EFC is calculated.
[This file contains the chart from page 5 in Portable Document Format (PDF).
It can be viewed with verson 3.0 or greater of the free Adobe Acrobat Reader software.]
If your parents get a Direct PLUS Loan for your expenses, the
amount they may borrow is limited only by the cost of attendance at
your school minus any other financial aid you receive.2
All Direct Loans except Direct Consolidation Loans have a loan
origination fee of 4 percent, deducted proportionately from each loan
disbursement. This money goes to the federal government to help
reduce the government's cost of supporting these low-interest loans.
Note: You might have both Federal Family Education Loans FFELs)
and Direct Loans. For example, you might have borrowed an FFEL
in the past, or you might transfer to a school that does not participate
in Direct Loans.3 Even if you have a combination of FFELs and
Direct Loans, your annual and total loan limits cannot exceed the
limits given in the chart on the previous page.
2If your parents can't borrow a Direct PLUS Loan for you because
they have an adverse credit history and if you're a dependent
undergraduate, you may be eligible to borrow additional amounts in
the form of Direct Unsubsidized Loans. For more information,
contact your financial aid office.
3Generally, you may not receive FFELs and Direct Loans for the
same academic year. However, there is an exception for transfer
students. For example, you could receive a Direct Loan for the first
semester and transfer in the second semester to a school that offers
The overall limit for any subsidized loans you may receive
(including a combination of Direct Subsidized Loans and subsidized
Federal Stafford Loans) is
+ $23,000 for undergraduate study
+ $65,500 for graduate study, including loans for undergraduate
The overall limit for subsidized and unsubsidized loans
(including a combination of Direct Loans and Federal Stafford
+ $23,000 for a dependent undergraduate student
+ $46,000 for an independent undergraduate student (and certain
+ $138,500 for a graduate or professional student (including loans
for undergraduate study)
Direct Loan interest rates are variable and are adjusted each year on
July 1. However, the interest rate will never be greater than 8.25
percent for Direct Subsidized Loans and Direct Unsubsidized Loans.
The interest rate may be less. (In 1995-96, it was 8.25 percent.)
Direct PLUS Loan interest rates also are variable but will never be
higher than 9 percent. The interest rate may be less. (In 1995-96, it
was 8.98 percent.)
The interest rates for Direct Consolidation Loans are the same as the
rates above, based on whether student loans and/or parent loans are
included. (For more information on consolidation loans, see page
How to Apply for a Direct Loan
Applying is easy. Just fill out a Free Application for Federal Student
Aid (FAFSA), which you can get from your school. Based on the
information you give on the FAFSA, your school will determine
your financial aid award, including the amounts of your Direct
Subsidized and Unsubsidized Loans, if you're eligible. If your
answers to certain questions on the FAFSA indicate you're a
dependent student (see page 3 for the definition of this term), your
parents may apply for a Direct PLUS Loan, using an application
available from your school.
As part of the application process, you'll receive a promissory note to
complete. The promissory note is the legal document you sign
agreeing to pay back the loan. The note also provides important
information about your loan. If your parents are applying for a Direct
PLUS Loan, they'll receive a promissory note to complete for their
loan. You and your parents will receive copies of the promissory
notes after they're signed.
If you have any questions about your loan during the application
process, you can call the Loan Origination Center at
After Loan Approval
If you're a first-time borrower, you'll most likely attend an entrance
counseling session, but you must, at a minimum, receive entrance
counseling materials from your school before your loan money can
be credited to your school account or delivered to you. Many of the
topics covered in this booklet will be covered in greater detail in the
counseling sessions and the written entrance counseling materials.
Be sure you understand all the terms and conditions of your loan and
your rights and responsibilities as a borrower. (See pages 31 and 32
of this booklet for a summary of those rights and responsibilities.)
Your school will pay you in one of two ways:
+ by crediting your account with the school for tuition, fees, and
other charges. If you have a contract with the school for room and
board, the school may also credit your school account to pay for your
room and board. Any remaining amount will be paid to you by
check, given to you as cash, or--with your permission--transferred
electronically to your bank account.
+ by paying you the entire amount by check or other means that
requires your endorsement or certification.
Note: Before each academic year begins, you must reapply for
financial aid. Each year, assuming your Direct Loan is approved,
your school account will be credited, you'll be paid by check or in
cash, or funds will be transferred electronically to your bank
What Happens While You're in School
Each time you receive a loan payment, your financial aid
administrator will make sure you're still eligible for the loan
proceeds. To stay eligible, you must be enrolled at least
half time and must be making satisfactory academic progress in
your course of study.
Here are some points to remember:
+ You don't have to make payments on your loans while you're
enrolled in school at least half time.
+ Be sure to keep the school informed if your enrollment status
changes--for example, if you drop to less than half time.
+ You'll receive information about your loan while you're still in
school-- this doesn't necessarily mean it's time to begin repayment.
Before you leave school, you must attend an exit counseling session.
At that time, your school will give you detailed information about
your loan. You'll be counseled about your loan obligations, with the
emphasis on selecting a repayment plan and budgeting for loan
repayment. You'll also be told about options for postponing
repayment, including deferment and forbearance. (See pages 19 and
22.) Your school will most likely tell you the current interest rate,
when you'll have to begin repayment, how much your loan will cost
you, and how much you'll repay each month.
If you have questions about your loan, you should be able to get the
answers during exit counseling. Keep any exit counseling materials
your school gives you because this information will be helpful as you
repay your loan.
Repaying Your Loans
The Direct Loan Servicing Center
Repayment will be simple, because the U.S. Department of
Education is your lender and will remain your lender. Your payments
will go to one place--your Direct Loan Servicing Center. Once you
get a loan, the Servicing Center becomes the point of contact for
information about your loan(s). The Servicing Center can also help
you decide which repayment plan is right for you. You must make
sure your Servicing Center has your correct address and telephone
number, and you should contact the Servicing Center if you have any
questions about, or problems with, loan repayment. See the
telephone number and address on page 33.
Repayment of your loan begins six months after the day you leave
school or drop below half-time enrollment. This six-month period is
called the "grace period." If you return to school at least half time
before the grace period ends, repayment of your loan will again
be delayed until six months after you finally leave school.
The first payment on Direct Subsidized and Direct Unsubsidized
Loans is due within 60 days after the grace period expires. The first
payment on a Direct PLUS Loan is due within 60 days after the final
If you have a Direct Subsidized Loan, you don't pay any interest
until the grace period expires. If you have a Direct Unsubsidized
Loan, interest accumulates on the loan while you're in school and
during the grace period. You can either pay this interest as it
accumulates or wait until you begin repaying the loan principal (the
amount of money you borrowed). If you decide to delay interest
repayment, the interest that accumulates will be "capitalized," that is,
will be added to your loan principal when you begin repayment. This
means your total loan principal will increase.
Whether you have a Direct Subsidized or Unsubsidized Loan, you'll pay
interest plus the loan principal; therefore, the total amount you repay will be more
than you borrowed. You may prepay your loan--that is, pay all of
your loan or make a payment that is larger than agreed upon--at any
time without penalty.
There are four ways you can repay a Direct Subsidized Loan or
Direct Unsubsidized Loan. Direct PLUS Loan borrowers may choose
only from the first three options given below. Borrowers can choose
a plan to fit their financial circumstances and can change plans if
their financial circumstances change. These are the four repayment
+ The Standard Repayment Plan requires fixed monthly payments
(at least $50) over a fixed period of time (up to 10 years). The length
of the repayment period depends on the loan amount. This plan
usually results in the lowest total interest paid because the repayment
period is shorter than under the other plans.
+ The Extended Repayment Plan allows loan repayment to be
extended over a period from generally 12 to 30 years, depending on
the total amount borrowed. You'll still pay a fixed amount each
month (at least $50), but your monthly payments usually will be
less than under the Standard Repayment Plan. These lower monthly
amounts may make repayment more manageable; however, usually
you'll pay more interest because the repayment period is longer.
+ The Graduated Repayment Plan allows payments to be low at first
and increase every two years. Graduated Repayment may be helpful
if your income starts out low but will increase steadily. Your
monthly payments must be at least half of what you would pay
under Standard Repayment. As in the Extended Repayment Plan, the
repayment period will vary from generally 12 to 30 years, depending
on the total amount borrowed. This extended repayment means your
monthly payments may be lower but, again, you'll pay more interest
than you would under Standard Repayment.
+ The Income Contingent Repayment Plan bases monthly payments
on your adjusted gross income (AGI) and the total amount of your
Direct Loans. As your income rises or falls each year, your
repayment amounts will be adjusted accordingly. Your required
monthly payments will not exceed 20 percent of your discretionary
income.4 The repayment period for this plan will not exceed 25
years. After 25 years, any unpaid amount will be discharged, but
you'll have to pay taxes on the amount discharged.
(Remember, this plan is not an option for Direct PLUS Loan
4Discretionary income equals your AGI minus an amount based on
the poverty level for your family size, as determined by the U.S.
Department of Health and Human Services. You can get more
information from your financial aid office or from the Direct Loan
If, because of exceptional circumstances, you can't repay your loans
using one of the repayment plans described, you may be able to work
out an alternative repayment plan with your Servicing Center. Such a
plan would be provided only on a case-by-case basis.
Choosing a Plan
You'll receive more detailed information about repayment options at
exit counseling and from your Servicing Center so you can select the
plan that's right for you. You'll be told what your monthly repayment
amounts would be under each plan. Once you've selected a plan,
your Servicing Center will send you a repayment schedule for all
your Direct Loans, listing the plan you selected and telling you what
your monthly payment will be and when your payments will be due.
If you don't choose a plan, you'll be placed in the Standard
Repayment Plan. (You can change your plan later if you choose.)
Parents with a Direct PLUS Loan will receive a repayment schedule
after the final disbursement of the loan.
Options for Postponing Repayment
If you ever have a problem making your monthly loan payments,
you may be able to postpone repayment through deferment or
forbearance. Each has separate conditions and requirements, as
A deferment means you may postpone making payments on your
loan under certain specific conditions. If you have Direct Loans only,
you may defer repayment if you are
+ enrolled at least half time in a program of study that meets the
U.S. Department of Education's requirements for program eligibility
(you may not defer repayment while in a medical internship or
residency program, except a residency program in dentistry)
+ enrolled in a graduate fellowship program approved by the U.S.
Department of Education
+ enrolled in a rehabilitation training program for persons with
disabilities that meets the U.S. Department of Education's
You also may be eligible for deferment for a period of up to three
years if you are
+ seeking, but unable to find, full-time employment
+ experiencing, or will experience, economic hardship (talk to the
Servicing Center for more information on this deferment)
You may be eligible for additional deferments if, at the time you
obtain a Direct Loan, you have an outstanding balance on an FFEL.
You can find out about these deferments from your financial aid
During deferment of Direct Subsidized Loans, you don't have to pay
any principal, and interest isn't charged. For Direct Unsubsidized
Loans and Direct PLUS Loans, payments on the principal may be
deferred, but interest is charged. You may choose to pay this interest
or have it capitalized (added to your principal balance) at the end of
the deferment period.
If you have a Direct Consolidation Loan (see page 26 for more
information about this type of loan), payment of principal may be
deferred. Interest may, however, accumulate during deferment,
depending on what loans you've consolidated. Check with the
financial aid office or your Direct Loan Servicing Center to find out
whether interest will accumulate on your Direct Consolidation Loan.
If you meet one of the deferment conditions and you want to
postpone repayment of your loan, you'll need to contact your
Servicing Center and ask for the appropriate deferment form. You'll
have to provide documentation to prove you meet the requirements
for the deferment you're seeking. The deferment form will explain
what information you must provide.
Be sure to make loan payments while you're waiting for your
deferment to be approved; if you don't, your loan may become
delinquent or even go into default (see descriptions of those terms
under "What Happens If You Don't Repay--Default").
If you're unable to make payments on your Direct Loan for reasons
such as unexpected personal problems or poor health and you don't
qualify for a deferment, you may request forbearance of loan
payments. During forbearance, you don't have to make payments,
you can extend the time between payments, or you can make smaller
payments than originally scheduled. You may request forbearance of
principal, interest, or both. Note that even if you receive a
forbearance for the interest, it will continue to accumulate during the
forbearance period and will be capitalized (added to your loan
principal) when the forbearance ends.
You may also receive forbearance if you meet one of the following
+ You serve in a medical or dental internship or residency.
+ You serve in a position under the National and Community
Service Trust Act of 1993.
+ You are obligated to make payments on your federal student loans
that are equal to, or greater than, 20 percent of your total monthly
Contact your Servicing Center to request forbearance. In most cases,
you'll be asked to provide documentation showing that you qualify.
As with deferments, continue to make payments on your loan while
you're waiting for forbearance approval.
What Happens If You Don't Repay--Default
The consequences of defaulting on your loan are severe and long-
lasting. They can be avoided if you keep your Servicing Center
informed of any difficulty in meeting your repayment terms. It's also
very important to keep the Servicing Center informed of any changes
in your address or telephone number to make sure the Center can
If you fail to make a payment on time, you're considered delinquent
in repaying your loan. If you don't make payments for 180 days,
your loan will go into default. Here are some examples of the serious
problems you will have if you default on your loan:
+ The U.S. Department of Education can immediately demand
repayment of the total amount due on the loan.
+ The Department will attempt to collect the debt and may charge
you for collection costs.
+ Your default will be reported to national credit bureaus; negative
reports will damage your credit rating and make it very difficult for
you to borrow money or make purchases such as a car or house. The
default notation will remain on your credit report for up to seven
years, even if you arrange to repay the debt before then--unless you
"rehabilitate" the loan (see page 24).
+ You won't receive any additional federal student aid.
+ You can't receive a deferment for your defaulted loans unless you
rehabilitate them (see below).
+ The Internal Revenue Service can withhold your federal income
+ Your wages may be garnished.
Obviously, you should avoid default if at all possible. However, if it
happens, you can contact your Servicing Center to make satisfactory
repayment arrangements that will reestablish your eligibility for
federal student aid. Six consecutive, voluntary, on time, full monthly
payments constitute satisfactory repayment arrangements. The
amount of the payments will be reasonable and affordable, based on
your total financial circumstances.
To "rehabilitate" your loan--that is, to bring it out of default--you
must make 12 consecutive, voluntary, reasonable, and affordable
monthly payments under an agreement with your Servicing Center.
Once you make these 12 payments, default information will be
removed from your credit record.
Loan Discharge (Cancellation)
Under a few very specific circumstances, your loan repayment can
be discharged (canceled), which means you are released from all
obligation to repay your loans:
+ You become totally and permanently disabled. A physician must
certify total and permanent disability. Also, the condition can't have
existed before you applied for your Direct Loans, unless a doctor
certifies that the condition has substantially deteriorated since the
loans were made.
+ You die. Your loans will be discharged, and any Direct PLUS
Loans your parents borrowed for you will be discharged.
+You cannot complete a course because the school falsely certified your eligibility.
If your parentsborrowed a Direct PLUS Loan for you, that loan also will be
+ You file for bankruptcy (in rare cases).
Contact your Servicing Center to apply for a discharge.
If you have student loans other than Direct Loans, you may want to
apply for a Direct Consolidation Loan. Consolidation means making
only one monthly payment to cover all your loans. There may be
several advantages for you if you consolidate. Because the interest
rate will be the same as for Direct Loans, you may be able to pay less
interest than you're paying on your current loans. You may be able to
reduce your monthly payments. You can also choose the repayment
plan that best suits your financial circumstances.
To consolidate under Direct Loans, you must have at least one Direct
Loan or FFEL Program loan.
Listed below are the types of loans that may be consolidated:
+ Direct Stafford/Ford Loans (subsidized and unsubsidized)
+ FFEL Stafford Loans (subsidized and unsubsidized)
+ Direct and Federal PLUS Loans
+ Guaranteed Student Loans (GSL)
+ Federal Insured Student Loans (FISL)
+ Federal Supplemental Loans for Students (SLS)
+ Auxiliary Loans to Assist Students (ALAS)
+ Federal Perkins Loans
+ National Direct/Defense Student Loans (NDSL)
+ Health Professions Student Loans (HPSL)
+ Health Education Assistance Loans (HEAL)
+ Loans for Disadvantaged Students (LDS)
+ Loans made under Subpart II of Part B of Title VIII of the Public
Health Service Act, including nursing loans
+ Direct and Federal Consolidation Loans
You can consolidate your loans at any time--while you're still in
School, during your six-month grace period, or after you begin
repayment. If you want to consolidate while you're in school and
you're attending a Direct Loan school, you must have at least one
Direct Loan or FFEL that is in an "in-school" period. If you're
attending a non-Direct Loan school, you must have a Direct Loan in
an "in-school" period. An "in-school period" begins when the loan is
disbursed and ends when the borrower ceases to be enrolled half
time.You can consolidate only Direct Loans and FFELs while you're
in school; the other types of loans listed above may be consolidated
after you leave school.
Note: If you want to consolidate during your grace period, you
should wait until the last month of the grace period to apply.
Repayment on consolidation loans begins within 60 days of the first
loan disbursement, which means your grace period would be cut
short if you applied too early.
Once you leave school, you can consolidate an FFEL under Direct
Loans only if you can't get an FFEL consolidation loan, or you can't
get an FFEL consolidation loan with income-sensitive repayment
terms acceptable to you.
Similar conditions apply to parents. They must have an outstanding
balance on a Direct PLUS Loan or a Federal PLUS Loan (under the
FFEL Program). Parents must not have an adverse credit history or,
if so, must either obtain an endorser for the loan who does not have
an adverse credit history or must document extenuating
Even defaulted loans may be consolidated if you agree either to
repay the loan under the Income Contingent Repayment Plan, or you
make satisfactory arrangements to repay the loan (for consolidation
purposes, defined as three consecutive, voluntary, on time, full
Note: A married couple may consolidate their loans jointly if at least
one spouse meets the requirements for loan consolidation. Both will
be responsible for repayment of the loan, even if one spouse dies or
they separate or divorce.
For more information on consolidation, contact your financial aid
office or the Direct Loan Servicing Center.
Borrower Rights and Responsibilities
As a Direct Loan borrower, you have certain rights and
responsibilities. You'll receive a complete list of these when you
receive your promissory note. Listed below are some to keep in
You have a right to
+ written information about your loan obligation--including
information on loan consolidation--and a list of your rights and
responsibilities as a borrower
+ information--before you begin repayment--on interest rates, loan
fees and how they are collected, and the balance owed on your loans
+ a loan repayment schedule
+ an explanation of default and its consequences
+ an explanation of the grace period and of federal interest benefits,
if you qualify for those benefits
+ prepayment of your loan without penalty
+ forbearance, if you qualify (forbearance is not granted
automatically; you must request it, and the U.S. Department of
Education decides if you qualify)
It is your responsibility to
+ repay the loan according to the loan repayment schedule
+ notify your Direct Loan Servicing Center in advance if you will be
late making a payment
+ notify your Servicing Center of anything that affects your ability
to repay or affects your eligibility for deferment or discharge
+ notify your school (if you are still enrolled) and your Servicing
Center of any change in your name or address or any change in your
employer's name or address
+ notify your Servicing Center if you fail to enroll for the period
covered by the loan, or if you graduate, withdraw from school, begin
attending less than half time, or transfer to another school
+ attend an exit counseling interview before you leave school
HOW TO REACH US
Applicant Services/Loan Servicing
+ general information about Direct Loans
+ questions about application processing
+ payment information
+ changing repayment plans
+ deferment and forbearance forms
+ address/name changes
+ working hours are from 8 a.m. to 8:30 p.m. (EST) Monday-Friday
U.S. Department of Education
Borrower Services Department
Direct Loan Servicing Center
P.O. Box 4609
Utica, NY 13504-4609
TDD: (800) 848-0983
Updated information is also available on the Direct Loan Web site on
the Internet at http://www.ed.gov/offices/OPE/DirectLoan/
Telephone numbers and information are subject to change without
[[This file contains the entire contents of the "All About Direct Loans 1996-98" booklet in
Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat